Traditional and Roth Individual Retirement Accounts (IRAs): A Primer - Updated August 20, 2020
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Traditional and Roth Individual Retirement
Accounts (IRAs): A Primer
Updated August 20, 2020
Congressional Research Service
https://crsreports.congress.gov
RL34397Traditional and Roth Individual Retirement Accounts (IRAs): A Primer Summary In response to concerns over the adequacy of retirement savings, Congress has created incentives to encourage individuals to save for retirement through a variety of retirement plans. Some retirement plans are employer-sponsored, such as 401(k) plans, and others are established by individual employees, such as Individual Retirement Accounts (IRAs). This report describes the primary features of two common retirement savings accounts that are available to certain individuals—traditional and Roth IRAs. Although the accounts have many features in common, they differ in some important aspects. Both traditional and Roth IRAs offer tax incentives to encourage individuals to save for retirement. Contributions to traditional IRAs may be tax deductible for taxpayers who (1) are not covered by a retirement plan at their place of employment or (2) have income below specified limits. Contributions to Roth IRAs are not tax deductible and eligibility is limited to those with incomes under specified limits. The tax treatment of distributions from traditional and Roth IRAs differs. Distributions from traditional IRAs are generally included in taxable income, whereas certain distributions from Roth IRAs are not included in taxable income. Some distributions may be subject to an additional 10% tax penalty, unless the distribution is for a reason specified in the Internal Revenue Code (e.g., distributions from IRAs after the individual is aged 59½ or older are not subject to the early withdrawal penalty). Individuals may roll over eligible distributions from other retirement accounts (such as an account balance from a 401(k) plan upon leaving an employer) into IRAs. Rollovers preserve retirement savings by allowing investment earnings on the funds in the retirement accounts to accrue on a tax-deferred basis, in the case of traditional IRAs, or a tax-free basis, in the case of Roth IRAs. The Retirement Savings Contribution Credit (also known as the Saver’s Credit) is a nonrefundable tax credit of up to $1,000 ($2,000 if married filing jointly). It was authorized in 2001 to encourage retirement savings among individuals with income under specified limits. This report explains IRAs’ eligibility requirements, contribution limits, tax deductibility of contributions, and withdrawal rules, and it provides data on the accounts’ holdings. It also describes the Saver’s Credit and provisions enacted after the Gulf of Mexico hurricanes in 2005, the Midwestern storms in 2008, the hurricanes in 2012 and 2017, the California wildfires in 2017, certain other federally declared disasters occurring on or after January 1, 2018, and the Coronavirus Disease 2019 (COVID-19) pandemic to exempt distributions to those affected from the 10% early withdrawal penalty. Congressional Research Service
Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Contents
Introduction ................................................................................................................... 1
Traditional IRAs ............................................................................................................. 2
Eligibility ................................................................................................................. 2
Contributions ............................................................................................................ 2
Investment Options .................................................................................................... 3
Deductibility of Contributions ..................................................................................... 3
Withdrawals ............................................................................................................. 5
Early Distributions..................................................................................................... 5
Rollovers.................................................................................................................. 6
Rollovers Limited to One Per Year .......................................................................... 7
Distributions After Traditional IRA Owner’s Death......................................................... 7
Designated Spouse Beneficiaries ............................................................................ 7
Designated Nonspouse Beneficiaries ....................................................................... 8
Eligible Designated Beneficiaries ........................................................................... 8
Nondesignated or Estate Beneficiaries ..................................................................... 8
Roth IRAs...................................................................................................................... 9
Eligibility and Contribution Limits ............................................................................... 9
Investment Options .................................................................................................. 10
Conversions and Rollovers........................................................................................ 11
Withdrawals ........................................................................................................... 11
Return of Regular Contributions ........................................................................... 11
Qualified Distributions ........................................................................................ 11
Nonqualified Distributions................................................................................... 12
Distributions After Roth IRA Owner’s Death ............................................................... 12
Retirement Savings Contribution Credit ........................................................................... 12
Data on IRA Assets, Sources of Funds, Ownership, and Contributions................................... 13
Tables
Table 1. Deductibility of IRA Contributions for Individuals Not Covered by a Retirement
Plan at Work for 2019 and 2020...................................................................................... 4
Table 2. Deductibility of IRA Contributions for Individuals Covered by a Retirement
Plan at Work for 2019 and 2020...................................................................................... 4
Table 3. Inherited IRA Distribution Rules ........................................................................... 9
Table 4. Roth IRA Eligibility and Annual Contribution Limits for 2019 and 2020 ................... 10
Table 5. Retirement Saving Contribution Credit Income Limits for 2019 and 2020 .................. 13
Table 6. Traditional and Roth IRAs: End of Year Assets ...................................................... 14
Table 7. Distribution of Individual Retirement Account (IRA) Balances in 2016 ..................... 14
Table 8. Ownership and Account Balances for IRAs in 2016 ................................................ 15
Table 9. Contributions to Traditional IRAs in 2017............................................................. 16
Table 10. Contributions to Roth IRAs in 2017 ................................................................... 17
Congressional Research ServiceTraditional and Roth Individual Retirement Accounts (IRAs): A Primer Appendixes Appendix. Qualified Distributions Related to Natural Disasters and COVID-19...................... 18 Contacts Author Information ....................................................................................................... 21 Acknowledgments......................................................................................................... 21 Congressional Research Service
Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Introduction
Individual Retirement Accounts (IRAs) are tax-advantaged accounts that individuals (or married
couples) can establish to accumulate funds for retirement. Depending on the type of IRA,
contributions may be made on a pretax or post-tax basis, and investment earnings are either tax-
deferred or tax-free. 1
IRAs were first authorized by the Employee Retirement Income Security Act of 1974 (ERISA;
P.L. 93-406). IRAs were originally limited to workers without pension coverage, but the
Economic Recovery Act of 1981 (P.L. 97-34) made all workers and spouses eligible for IRAs.
The Tax Reform Act of 1986 (P.L. 99-514) limited the eligibility for tax-deductible contributions
to individuals whose employers do not sponsor plans and to those whose employers sponsor plans
but who have earnings below certain thresholds. The Taxpayer Relief Act of 1997 (P.L. 105-34)
allowed for certain penalty-free withdrawals and authorized the Roth IRA, which provides tax-
free growth from after-tax contributions.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) significantly
affected the contribution limits in these plans in three ways: it (1) increased the limits, (2) indexed
the limits to inflation, and (3) allowed for individuals aged 50 and older to make additional
“catch-up” contributions. Among other provisions, the Pension Protection Act of 2006 (PPA; P.L.
109-280) made permanent the indexing of contribution limits to inflation, allowed taxpayers to
direct the Internal Revenue Service (IRS) to deposit tax refunds directly into an IRA, and
temporarily allowed for certain tax-free distributions for charitable contributions (which was later
made permanent by P.L. 114-113). 2
The Setting Every Community up for Retirement Enhancement Act of 2019 (SECURE Act),
enacted as Division O of the Further Consolidated Appropriations Act of 2020 (P.L. 116-94),
included multiple provisions related to IRAs. The SECURE Act
repealed the maximum age at which individuals can contribute to traditional
IRAs;
increased the age at which required minimum distributions (RMDs) from
traditional IRAs must begin;
treated certain nontuition fellowship and stipend payments as compensation for
IRA contribution purposes;
treated tax-exempt “difficulty of care” payments to home healthcare providers as
compensation for nondeductible IRA contribution limit purposes;
allowed penalty-free early withdrawals for qualifying birth and adoption
purposes; and
modified distribution rules for inherited IRAs.
This report describes the two types of IRAs that individual workers can establish: traditional
IRAs and Roth IRAs. 3 It describes the rules regarding eligibility, contributions, and withdrawals.
It also describes a tax credit for retirement savings contributions. An Appendix explains rules
1
For more information on the tax treatment of retirement savings, including Individual Retirement Accounts (IRAs),
see U.S. Congress, Joint Committee on T axation, Present Law And Background Relating To The Tax Treatmen t Of
Retirement Savings, prepared by Joint Committee on T axation, 112 th Cong., 2 nd sess., April 13, 2012, JCX-32-12.
2 See also 26 U.S.C. §408 for traditional IRAs and 26 U.S.C. §408A for Roth IRAs.
3
T here are also two types of IRA-based retirement plans available to small employers: Simplified Employee Pensions
(SEP-IRA) and Savings Incentive Match Plans for Employees (SIMPLE-IRA). T hese are not discussed in this report.
Congressional Research Service 1Traditional and Roth Individual Retirement Accounts (IRAs): A Primer related to penalty-free distributions for those affected by the 2005 Gulf of Mexico hurricanes and the 2008 Midwestern floods. The Appendix also describes the relief provided to those affected by Hurricane Sandy in 2012; Hurricanes Harvey, Irma, and Maria in 2017; the California wildfires in 2017; certain other federally declared disasters taking place on or after January 1, 2018; and the Coronavirus Disease 2019 (COVID-19) pandemic. Traditional IRAs Traditional IRAs are funded by workers’ contributions, which may be tax deductible. The contributions accrue investment earnings in an account, and these earnings are used as a source of income in retirement. Among the benefits of traditional IRAs, two are (1) pretax contributions, which provide larger bases for accumulating investment earnings and, thus, may provide larger account balances at retirement than if the money had been placed in taxable accounts; and (2) taxes are paid when funds are distributed. Because income tax rates in retirement are often lower than during working life, traditional IRA holders are likely to pay less in taxes when contributions are withdrawn than when the income was earned. Eligibility Individuals who receive taxable compensation can set up and contribute to IRAs. 4 Examples of compensation include wages, salaries, tips, commissions, self-employment income, nontaxable combat pay, and alimony (which is treated as compensation for IRA purposes).5 Compensation also includes nontuition fellowship and stipend payments (i.e., payments to individuals that are used in the pursuit of graduate or postdoctoral study).6 Tax-exempt “difficulty of care” payments to home healthcare workers (i.e., payments for the additional care needed for certain qualified foster individuals) are treated as compensation for nondeductible IRA contribution limit purposes. 7 Individuals who receive income only from noncompensation sources cannot contribute to IRAs. Contributions Individuals may contribute either their gross compensation or the contribution limit, whichever is lower. In 2020, the annual contribution limit is $6,000. Since 2009, the contribution limit has been subject to cost-of-living adjustments. 8 Individuals aged 50 and older may make additional annual $1,000 catch-up contributions. For households that file a joint return, spouses may contribute an amount equal to the couple’s total compensation (reduced by the spouse’s IRA contributions) or the contribution limit ($6,000 each, if younger than the age of 50, and $7,000 each, if aged 50 and older), whichever is lower. Contributions that exceed the contribution limit 4T he SECURE Act (Division O of P.L. 116-94) repealed the maximum age at which individuals may contribute to IRAs. Prior to the SECURE Act, individuals were not allowed to contribute to traditional IRAs afte r reaching age 70½. 5 See Internal Revenue Service (IRS), Tax Topic Number 451 - Individual Retirement Arrangements (IRAs), at https://www.irs.gov/taxtopics/tc451. 6 Section 106 of the SECURE Act (Division O of P.L. 116-94) added this provision. 7 Section 116 of the SECURE Act (Division O of P.L. 116-94) added this provision. Individuals with “difficulty of care” payments may increase their nondeductible IRA contribution limit (in 2020, this limit is the individual’s taxable income, up to $6,000 [$7,000 for individuals aged 50 and older]) by some or all of the amount of these payments. See IRS, Publication 590-A, at https://www.irs.gov/publications/p590a#en_US_2019_publink100031635. T hese payments do not affect deductibility. 8 26 U.S.C. §415 requires the adjustments be made with procedures used to adjust Social Security benefit amounts. For more information on Social Security adjustments, see CRS Report 94-803, Social Security: Cost-of-Living Adjustments. Congressional Research Service 2
Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
and are not withdrawn by the due date for that year’s tax return are considered excess
contributions and are subject to a 6% “excess contribution” tax. Contributions made between
January 1 and April 15 may be designated for either the current year or the previous year.
Because IRAs were intended for workers without an employer-sponsored pension to save for
retirement, contributions to an IRA may only come from work income, such as wages and tips.
The following noncompensation sources of income cannot be used for IRA contributions:
earnings from property, interest, or dividends;
pension or annuity income;
deferred compensation;
income from partnerships for which an individual does not provide services that
are a material income-producing factor; and
foreign earned income.
Investment Options
IRAs can be set up through many financial institutions, such as banks, credit unions, mutual
funds, life insurance companies, or stock brokerages. These financial institutions offer an array of
investment choices. Individuals can transfer their accounts from one financial institution to
another at will.
Several transactions could result in additional taxes or the loss of IRA status. These transactions
include borrowing from IRAs; using IRAs as collateral for loans; selling property to IRAs; and
investing in collectibles like artwork, antiques, metals, gems, stamps, alcoholic beverages, and
most coins. 9
Deductibility of Contributions
IRA contributions may be non-tax-deductible, partially tax-deductible, or fully tax-deductible,
depending on whether the individual or spouse is covered by a pension plan at work and their
level of adjusted gross income (AGI). 10 Individuals are covered by a retirement plan if (1) the
individuals or their employers have made contributions to a defined contribution pension plan or
(2) the individuals are eligible for a defined benefit pension plan (even if they refuse
participation).
For individuals and households not covered by a retirement plan at work, Table 1 outlines the
income levels at which they may deduct all, some, or none of their IRA contributions, depending
on the spouse’s pension coverage and the household’s AGI. Individuals without employer-
sponsored pensions and, if married, whose spouse also does not have pension coverage, may
deduct up to the contribution limit from their income taxes regardless of their AGI.
For individuals and households who are covered by a retirement plan at work, Table 2 outlines
the income levels at which they may deduct all, some, or none of their IRA contributions,
depending on the individual’s or household’s AGI.
9
Gold, silver, and platinum coins issued by the U.S. T reasury, and gold, silver, palladium, and platinum bullion are
permissible.
10IRS, “Definition of Adjusted Gross Income,” at https://www.irs.gov/e-file-providers/definition-of-adjusted-gross-
income.
Congressional Research Service 3Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Individuals may still contribute to IRAs up to the contribution limit even if the contribution is
nondeductible. Nondeductible contributions come from post-tax income, not pretax income.11
Only contributions greater than the contribution limits are considered excess contributions.
Worksheets for computing partial deductions are included in “IRS Publication 590-A,
Contributions to Individual Retirement Arrangements (IRAs).”12
Table 1. Deductibility of IRA Contributions for Individuals
Not Covered by a Retirement Plan at Work for 2019 and 2020
2019 Adjusted 2020 Adjusted Deduction
Filing Status Gross Income Gross Income Allowed
Single, head of household, qualifying widow(er), Any amount Any amount Full deduction
or married filing jointly or separately with a
spouse who is not covered by a plan at work
Married filing jointly with a spouse who is $193,000 or less $196,000 or less full deduction
covered by a plan at work
More than $193,000 More than $196,000 Partial
but less than but less than deduction
$203,000 $206,000
$203,000 or more $206,000 or more No deduction
Married filing separately with a spouse who is Less than $10,000 Less than $10,000 Partial
covered by a plan at work deduction
$10,000 or more $10,000 or more No deduction
Sources: IRS Publication 590-A, at http://www.irs.gov/publications/p590a/ and 2020 Limitations Adjusted As
Provided in Section 415(d), etc., Notice 2019-59, at https://www.irs.gov/pub/irs-drop/n-19-59.pdf.
Table 2. Deductibility of IRA Contributions for Individuals
Covered by a Retirement Plan at Work for 2019 and 2020
2019 Adjusted 2020 Adjusted Deduction
Filing Status Gross Income Gross Income Allowed
Single or head of household $64,000 or less $65,000 or less Full deduction
More than $64,000 but less More than $65,000 but less Partial deduction
than $74,000 than $75,000
$74,000 or more $75,000 or more No deduction
Married filing jointly or $103,000 or less $104,000 or less Full deduction
qualifying widow(er)
More than $103,000 but less More than $104,000 but less Partial deduction
than $123,000 than $124,000
$123,000 or more $124,000 or more No deduction
Married filing separately Less than $10,000 Less than $10,000 Partial deduction
$10,000 or more $10,000 or more No deduction
Sources: IRS Publication 590-A, at http://www.irs.gov/publications/p590a/ and 2020 Limitations Adjusted As
Provided in Section 415(d), etc., Notice 2019-59, at https://www.irs.gov/pub/irs-drop/n-19-59.pdf.
11 One advantage to placing post -tax income in traditional IRAs is that investment earnings on nondeductible
contributions are not taxed until distributed.
12 T he publication is available on the IRS website at http://www.irs.gov/publications/p590a.
Congressional Research Service 4Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Withdrawals
Withdrawals from IRAs are subject to income tax in the year that they are received. Early
distributions are withdrawals made before the age of 59½. Early distributions may be subject to
an additional 10% penalty.
To ensure that IRAs are used for retirement income and not for bequests, IRA holders must begin
making withdrawals by April 1 of the year after reaching the age of 72 (i.e., the required
beginning date). 13 The minimum amount that must be withdrawn (i.e., the required minimum
distribution, or RMD) for each year is calculated by dividing the account balance on December
31 of the year preceding the distribution by the IRA owner’s life expectancy as found in IRS
Publication 590-B. 14 Although females live longer on average than males, the IRS does not
separate life expectancy tables for males and females for this purpose. 15 RMDs must be received
by December 31 of each year. Failure to take the RMD results in a 50% excise tax on the amount
that was required to have been distributed. Congress suspended the RMD provision for 2009. 16
Beginning in 2007, distributions from IRAs after the age of 70½ could be made directly to
qualified charities and excluded from gross income. This provision for Qualified Charitable
Distributions was made permanent in P.L. 114-113. 17
Early Distributions
Early distributions are withdrawals made before the age of 59½. Early distributions —just like
distributions after the age of 59½—are subject to federal income tax. To discourage the use of
IRA funds for preretirement uses, most early distributions are subject to a 10% tax penalty. 18 The
early withdrawal penalty does not apply if the IRA owner is younger than age 59½ and the
distributions
occur if the individual is a beneficiary of a deceased IRA owner;
occur if the individual is disabled;
are in substantially equal payments over the account holder’s life expectancy;
are received after separation from employment after the age of 55;
are for unreimbursed medical expenses in excess of 7.5% of AGI (10% if under
age 65);
are for medical insurance premiums in the case of unemployment;
13 Section 114 of the SECURE Act (Division O of P.L. 116-94) modified the age at which individuals must begin
taking RMDs from 70½ to 72. T he provision applies to account owners who turn age 70½ on or after January 1, 2020.
14 Life expectancy is calculated differently depending on whether the account holder (1) is single and an IRA
beneficiary, (2) has a spouse who is more than 10 years younger, (3) has a spouse who is not more than 10 years
younger, (4) whose spouse is not the sole beneficiary, or (5) is unmarried.
15
See, e.g., the Social Security Actuarial Life T able, at https://www.ssa.gov/oact/ST AT S/table4c6.html. T he Supreme
Court ruled in Arizona Governing Comm. vs. Norris, 463 U.S. 1073 (1983), that employer-provided pension plans must
use unisex tables in calculating monthly annuity benefits. Citing this ruling, the IRS constructs its own unisex life
expectancy tables. See 26 U.S.C. §417(e)(3)(A)(ii).
16 Congress did not enact any of the proposals that were introduced to suspend the RMD in years after 2009. See CRS
Report R40192, Early Withdrawals and Required Minimum Distributions in Retirement Accounts: Issues for Congress.
17
See CRS In Focus IF11377, Qualified Charitable Distributions from Individual Retirement Accounts. T he SECURE
Act did not modify the age at which qualified charitable distributions can be made.
18 See 26 U.S.C. §72(t).
Congressional Research Service 5Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
are used for higher education expenses;
are used to build, buy, or rebuild a first home up to a $10,000 withdrawal limit;
are used for expenses related to the qualified birth or adoption of a child (up to a
$5,000 withdrawal limit taken within one year following the event);19
occur if the individual is a reservist called to active duty after September 11,
2001;
were distributions to residents in areas affected by Hurricanes Katrina, Rita, and
Wilma from around the storms’ landfalls to January 1, 2007;
were distributions to residents in areas affected by the Midwestern floods in 2008
from after the applicable disaster date and before January 1, 2010;
were distributions to residents in areas affected by the California wildfires in
2017 on or after October 8, 2017, and before December 31, 2017;
were distributions to residents in areas affected by Hurricanes Harvey, Irma, and
Maria from around the storms’ landfalls to January 1, 2019;
were distributions to residents in an area that was declared to be a federal disaster
zone from January 1, 2018, to 60 days after the enactment of P.L. 116-94 on
December 20, 2019; or
were distributions to qualified individuals in response to COVID-19 (as defined
in law and IRS guidance) on or after January 1, 2020, and before December 31,
2020.
Although early withdrawals from IRAs are permitted without reason, individuals will be subject
to the 10% tax penalty unless they meet one of the conditions above. There are no other general
“hardship” exceptions for penalty-free distributions from IRAs.
Rollovers
Rollovers are transfers of assets from one retirement plan to another upon separation from the
original employer. Rollovers are not subject to the 59½ rule, the 10% penalty, or the contribution
limit. Rollovers can come from traditional IRAs, employers’ qualified retirement plans (e.g.,
401(k) plans), deferred compensation plans of state or local governments (Section 457 plans),
tax-sheltered annuities (Section 403(b) plans), or the Thrift Savings Plan for federal employees.
Rollovers can be either direct trustee-to-trustee transfers or issued directly to individuals who
then deposit the rollovers into traditional IRAs. 20 Individuals have 60 days from the date of the
distribution to make rollover contributions. Rollovers not completed within 60 days are
considered taxable distributions and may be subject to the 10% early withdrawal penalty. In
addition, in cases where individuals directly receive a rollover, 20% of the rollover is withheld for
tax purposes. Direct trustee-to-trustee transfers are not subject to withholding taxes. In cases
where individuals directly receive a rollover, they must have an amount equal to the 20%
withheld available from other sources to place in the new IRA. If the entire distribution is rolled
over within 60 days, the amount withheld is applied to individuals’ income taxes paid for the year.
19
Section 113 of the SECURE Act (Division O of P.L. 116-94) added this provision. T his provision is effective for
distributions made after December 31, 2019.
20A trustee-to-trustee transfer is a transfer of funds made directly between two financial institutions. T he individual
does not take possession of the funds at any point.
Congressional Research Service 6Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Rollovers Limited to One Per Year
A January 2014 U.S. Tax Court decision required that, in certain circumstances, individuals are
limited to a total of one rollover per year for their IRAs. 21 Rollovers subject to this rule are those
between two IRAs in which an individual receives funds from an IRA and deposits the funds into
a different IRA within 60 days. The one-rollover-per-year limit applies to rollovers between two
traditional IRAs or two Roth IRAs. It does not apply to rollovers from a traditional IRA to a Roth
IRA (i.e., a conversion). The limitation does not apply to trustee-to-trustee transfers (directly from
one financial institution to another) or rollovers from qualified pension plans (such as from
401(k) plans).
Distributions After Traditional IRA Owner’s Death
When the owner of an IRA dies, ownership passes to the account’s designated beneficiary or, if
no beneficiary has been named, to the decedent’s estate. Federal law has different distribution
requirements depending on whether the new owner is a
designated spouse beneficiary,
designated nonspouse beneficiary,
eligible designated beneficiary, or
nondesignated or estate beneficiary. 22
Some distribution rules depend on whether the IRA owner died prior to the required beginning
date, the date on which distributions from the account must begin. This is April 1 of the year
following the year in which the IRA owner reaches the age of 72.
Designated Spouse Beneficiaries
A designated spouse beneficiary is allowed to (1) become the new account owner; (2) roll over
the account to the spouse’s own traditional or Roth IRA or qualified employer plan, such as a
401(k), 403(a), 403(b), or 457(b) plan; or (3) be treated as a beneficiary rather than account
owner (in this case, see the rules for eligible designated beneficiaries below). A nonspouse
beneficiary cannot take ownership of an inherited account. Instead, the account becomes an
inherited IRA designated for the nonspouse beneficiary in the name of the deceased account
owner.
A spouse who takes ownership of an inherited traditional IRA must determine the RMD using his
or her own life expectancy. A spouse who takes ownership of an inherited Roth IRA (rather than
becoming a beneficiary) does not have to take an RMD. A spouse who is the sole beneficiary and
chooses to be treated as beneficiary (rather than as owner) may postpone distributions until the
original owner would have reached age 72. This rule applies to both traditional and Roth IRAs.
21
See Bobrow v. Commissioner, T .C. Memo. 2014-21 (United States T ax Court 2014), at https://www.ustaxcourt.gov/
UstcInOp/OpinionViewer.aspx?ID=377. T he court case addressed a situation in which an individual and his spouse
used the 60-day rollover period to continuously move amounts from one IRA to another, thereby gaining access to
funds for an extended period of time. Prior to this decision, the IRS applied the one-rollover-per-year on an IRA-by-
IRA basis.
22 Section 401 of SECURE Act (Division O of P.L. 116-94) modified distribution rules for designated beneficiaries of
account owners who die after December 31, 2019.
Congressional Research Service 7Traditional and Roth Individual Retirement Accounts (IRAs): A Primer Designated Nonspouse Beneficiaries Under the SECURE Act, a designated nonspouse beneficiary of an account owner who dies after December 31, 2019, must distribute the entire account balance by the end of the 10th calendar year following the account owner’s year of death (the “10-year rule”), regardless of whether the original account owner dies before or after the required beginning date. Beneficiaries may choose the frequency and timing of distributions so long as the account is depleted within the 10-year period. Eligible Designated Beneficiaries The SECURE Act allows for exceptions to the 10-year rule for an eligible designated beneficiary, which include (1) a surviving spouse, (2) the account owner’s child who has not reached the age of majority, (3) an individual who is disabled, (4) a chronically ill individual, and (5) an individual who is not more than 10 years younger than the account owner. These eligible designated beneficiaries may generally take distributions over their remaining life expectancy rather than adhere to the 10-year rule. A minor child of an account owner who is a beneficiary may calculate distributions based on his or her remaining life expectancy until reaching the age of majority (age 18 in most states), at which point the remaining account balance must be distributed within 10 years. Nondesignated or Estate Beneficiaries If the account owner dies before the required beginning date and (1) does not designate a beneficiary or (2) designates a trust as beneficiary, the account balance must be distributed within five years (“the 5-year rule”). Nondesignated and estate beneficiaries of a Roth IRA must take distributions as if the account owner died before the required beginning date (i.e., within five years). If the account owner dies after the required beginning date, the account balance must be distributed at the same rate or faster than the original account owner was taking distributions (i.e., the distribution period is based on the deceased account owner’s life expectancy as of the year of death; life expectancy is reduced by one year for each subsequent RMD). The SECURE Act did not change distribution rules for nondesignated beneficiaries. The distribution rules are summarized in Table 3. Distributions from inherited traditional IRAs are included in taxable income but are not subject to the 10% early withdrawal penalty. An individual who fails to take an RMD will generally incur a 50% excise tax of the amount that was required to have been withdrawn. In some cases, IRAs have beneficiaries’ distributions requirements that are more stringent than those summarized in Table 3. For example, an IRA’s plan documents could require that a designated spouse or designated nonspouse beneficiary distribute all assets in the IRA by the end of the fifth year of the year following the IRA owner’s death. In such a case, the beneficiary would not have the option to take distributions over a longer period of time. Unless the IRA’s plan documents specify otherwise, it is possible to take distributions faster than required in Table 3. For example, a beneficiary may elect to distribute all assets in a single year (i.e., a lump sum distribution). In such a case, the entire amount distributed is included in taxable income for that year. Congressional Research Service 8
Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Table 3. Inherited IRA Distribution Rules
Owner Dies Before Required Owner Dies on or After Required Beginning
Beginning Date Date
Treat as own, does not have to take
any distribution until the age of 72,
Treat as own, does not have to take any
but is subject to the 59½ rule, or
distribution until the age of 72, but is subject to the
Designated Spouse Keep in decedent’s name and take 59½ rule, or
Beneficiary distributions based on own life
Keep in decedent’s name and take distributions
expectancy. Distributions do not have
based on own life expectancy.
to begin until decedent would have
turned 72.
Designated
Nonspouse Take distributions within 10 years.
Beneficiary
Eligible Designated
Take distributions over the beneficiary’s remaining life expectancy.
Beneficiariesa
Must distribute IRA assets at least as quickly as the
Must distribute all IRA assets by the owner had been taking them (i.e., take a yearly
Nondesignated or
end of the fifth year of the year distribution based on the owner’s age as of
Estate Beneficiaries
following the IRA owner’s death. birthday in the year of death, reduced by one for
each year after the year of death).
Sources: 26 U.S.C. § 401(a)(9) and P.L. 116-94.
Notes: The required beginning date is the date on which distributions from the account must begin. It is April 1
of the year following the year in which the owner of an IRA reaches the age of 72.
a. An eligible designated beneficiary includes a surviving spouse of the account owner (options for a sp ouse
are described separately in the table); the account owner’s child who has not reached the age of majority
(minor child distributions are calculated based on the child’s remaining life expectancy through the year that
the child reaches the age of majority, after which the 10-year rule applies); an individual who is disabled, a
chronically ill individual, and an individual who is not more than 10 years younger than the account owner.
Roth IRAs
Roth IRAs were authorized by the Taxpayer Relief Act of 1997 (P.L. 105-34). The key differences
between traditional and Roth IRAs are that contributions to Roth IRAs are made with after-tax
funds and qualified distributions are not included in taxable income; investment earnings accrue
free of taxes. 23
Eligibility and Contribution Limits
In contrast to traditional IRAs, Roth IRAs have income limits for eligibility. Table 4 lists the
AGIs at which individuals may make the maximum contribution and the ranges in which this
contribution limit is reduced. 24 For example, a 40-year-old single taxpayer with income of
$90,000 may contribute $6,000 in 2020. A similar taxpayer making $125,000 would be subject to
23
Roth IRAs are named for former Senator William Roth.
24
If warranted, the income limits are increased for cost -of-living adjustments. See 2019 Limitations Adjusted As
Provided in Section 415(d), etc., Notice 2018-83, at https://www.irs.gov/pub/irs-drop/n-18-83.pdf; and 2020
Limitations Adjusted As Provided in Section 415(d), etc., Notice 2019-59, at https://www.irs.gov/pub/irs-drop/n-19-
59.pdf.
Congressional Research Service 9Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
a reduced contribution limit, whereas a taxpayer with income of $140,000 would be ineligible to
contribute to a Roth IRA.
Like traditional IRAs, Roth IRA contributions must come from earned income, excess
contributions are subject to the 6% tax, and contributions made between January 1 and April 15
may be designated for either the current year or the previous year.
Table 4. Roth IRA Eligibility and Annual Contribution Limits for 2019 and 2020
2019 Modified 2020 Modified
Adjusted Gross 2019 Contribution Adjusted Gross 2020 Contribution
Filing Status Income (AGI) Limits Income (AGI) Limits
$6,000 ($7,000 if 50
$6,000 ($7,000 if 50
Less than years or older) or Less than
years or older) or AGI,
Single, head of $122,000 AGI, whichever is $124,000
whichever is smaller
household, married smaller
filing separately (and At least $122,000 At least $124,000
did not live with Reduced contribution Reduced contribution
but less than but less than
spouse at any time limit limit
$137,000 $139,000
during the year)
$137,000 or $139,000 or
Ineligible to contribute Ineligible to contribute
more more
Married filing Reduced contribution Less than Reduced contribution
Less than $10,000
separately and lived limit $10,000 limit
with spouse at any
time during the year $10,000 or more Ineligible to contribute $10,000 or more Ineligible to contribute
$6,000 ($7,000 each if $6,000 ($7,000 each if
Less than Less than
50 and older) or AGI, 50 and older) or AGI,
$193,000 $196,000
whichever is smaller whichever is smaller
Married filing jointly, At least $193,000 At least $196,000
Reduced contribution Reduced contribution
qualifying widow(er) but less than but less than
limit limit
$203,000 $206,000
$203,000 or $206,000 or
Ineligible to contribute Ineligible to contribute
more more
Sources: IRS Publication 590-A, available at http://www.irs.gov/publications/p590a/ and IRS News Release IR-
2019-179, at https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-
rises-to-6500.
Notes: Individuals aged 50 and older can make additional $1,000 catch -up contributions. The adjusted gross
income (AGI) limit for eligibility has been adjusted for inflation since 2007; beginning in 2009, the traditional and
Roth IRA contribution limit has also been adjusted for inflation. A worksheet for computing reduced Roth IRA
contribution limits is provided in IRS Publication 590-A.
Investment Options
Roth IRAs must be designated as such when they are set up. As with traditional IRAs, they can be
set up through many financial institutions. Transactions prohibited within traditional IRAs are
also prohibited within Roth IRAs.
Congressional Research Service 10Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Conversions and Rollovers
Individuals may convert amounts from traditional IRAs, SEP-IRAs, or SIMPLE-IRAs to Roth
IRAs. 25 Since 2008, individuals have been able to roll over distributions directly from qualified
retirement plans to Roth IRAs. The amount of the conversion must be included in taxable income.
Conversions can be a trustee-to-trustee transfer, a same trustee transfer by redesignating the IRA
as a Roth IRA, or a rollover directly to the account holder. Inherited IRAs cannot be converted.
Contributions (not rollovers or conversions) made to a traditional or Roth IRA can be
recharacterized as having been made to the other type of IRA. However, conversions and
rollovers to a Roth IRA made during or after 2018 cannot be recharacterized to a traditional
IRA. 26
Rollover rules that apply to traditional IRAs, including completing a rollover within 60 days, also
apply to Roth IRAs. In addition, withdrawals from a converted IRA prior to five years from the
beginning of the year of conversion are nonqualified distributions and are subject to a 10%
penalty (see the “Nonqualified Distributions” section of this report).
Tax-free withdrawals from one Roth IRA transferred to another Roth IRA are allowed if
completed within 60 days. Rollovers from Roth IRAs to other types of IRAs or to employer-
sponsored retirement plans are not allowed.
Withdrawals
The three types of Roth IRA distributions are (1) returns of regular contributions, (2) qualified
distributions, and (3) nonqualified distributions. Returns of regular contributions and qualified
distributions are not included as part of taxable income.
Return of Regular Contributions
Roth IRA distributions that are a return of regular contributions, which are withdrawals of
original contributions, are neither included in taxable income nor subject to the 10% penalty.
Qualified Distributions
Qualified distributions, which include earnings on contributions, must satisfy both of the
following:
they are made after the five-year period beginning with the first taxable year for
which a Roth IRA contribution was made, and
25 Simplified Employee Pensions (SEP -IRA) and Savings Incentive Match Plans for Employees (SIMPLE-IRA) are
employer-sponsored IRAs available to small employers. SIMPLE-IRAs may be rolled over after two years. Prior to
January 1, 2010, only individuals with income under specified thresholds were eligible to make conversions from
traditional to Roth IRAs. T he T ax Increase Prevention and Reconciliation Act of 2005 (T IPRA; P.L. 109-222)
eliminated the income thresholds.
26
A provision in P.L. 115-97 (a budget reconciliation bill that was originally called the T ax Cuts and Jobs Act)
repealed a special rule that allowed conversions and rollovers to be recharacterized. Prior to the repeal of the special
rule, an individual could have rolled amounts from a traditional IRA to a Roth IRA and then, prior to the due date of
the individual’s tax return, could have transferred the assets back to a traditional IRA. In certain circumstances, this
could have a beneficial effect on an individual’s taxable income.
Congressional Research Service 11Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
they are made on or after the age of 59½; because of disability; to a beneficiary
or estate after death; or to purchase, build, or rebuild a first home up to a $10,000
lifetime limit. 27
Nonqualified Distributions
Distributions that are neither returns of regular contributions nor qualified distributions are
considered nonqualified distributions. A 10% penalty applies to nonqualified distributions unless
one of the exceptions in 26 U.S.C. §72(t) applies. The exceptions are identical to those previously
listed for early distributions from traditional IRAs. Although individuals might have several Roth
IRAs from which withdrawals can be made, for tax purposes nonqualified distributions are
assumed to be made in the following order:
1. the return of regular contributions,
2. conversion contributions on a first-in-first-out basis, and
3. earnings on contributions.
The taxable portion of any nonqualified distribution (e.g., earnings on contributions) may be
included in taxable income. A worksheet is available in IRS Publication 590-B to determine the
taxable portion of nonqualified distributions.
Distributions After Roth IRA Owner’s Death
The Roth IRA’s original owner does not have to take an RMD (and therefore, has no required
beginning date). Following the initial account owner’s death, the Roth IRA beneficiary must take
an RMD using the same rules that apply to traditional IRAs as if the account owner had died
before the required beginning date.
Distributions from inherited Roth IRAs are generally free of income tax. The beneficiary may be
subject to taxes if the Roth IRA owner dies before the end of (1) the five-year period beginning
with the first taxable year for which a contribution was made to a Roth IRA or (2) the five-year
period starting with the year of a conversion from a traditional IRA to a Roth IRA. The
distributions are treated as described in the “Nonqualified Distributions” section of this report.
Retirement Savings Contribution Credit
The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) authorized a
nonrefundable tax credit of up to $1,000, or $2,000 if filing a joint return, for eligible individuals
who contribute to IRAs or employer-sponsored retirement plans. The Retirement Savings
Contribution Credit, also referred to as the Saver’s Credit, is in addition to the tax deduction for
contributions to traditional IRAs or other employer-sponsored pension plans. To receive the
credit, a taxpayer must be at least 18 years old, not be a full-time student, not be a dependent on
someone else’s tax return, and have AGI less than certain limits. The limits are in Table 5. For
example, individuals who make a $2,000 IRA contribution in 2020, have income of $15,000, and
list their filing status as single would be able to reduce their 2020 tax liability by up to $1,000. 28
27 T he five-year period is not necessarily five calendar years. Contributions made from January 1 to April 15 could be
considered made in the previous tax year.
28 For more information on the Saver’s Credit, see CRS In Focus IF11159, The Retirement Savings Contribution
Credit.
Congressional Research Service 12Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Table 5. Retirement Saving Contribution Credit Income Limits
for 2019 and 2020
Filing Status 2019 Income Limits 2020 Income Limits Percentage Credit
Single, Married Filing Separately, $1 to $19,250 $1 to $19,500 50%
Qualifying Widow(er)
$19,251 to $20,750 $19,501 to $21,250 20%
$20,751 to $32,000 $21,251 to $32,500 10%
more than $32,000 more than $32,500 0%
Head of Household $1 to $28,875 $1 to $29,250 50%
$28,876 to $31,125 $29,251 to $31,875 20%
$31,126 to $48,000 $31,876 to $48,750 10%
more than $48,000 more than $48,750 0%
Married Filing Jointly $1 to $38,500 $1 to $39,000 50%
$38,501 to $41,500 $39,001 to $42,500 20%
$41,501 to $64,000 $42,501 to $65,000 10%
more than $64,000 more than $65,000 0%
Sources: IRS Publication 590-A, at http://www.irs.gov/publications/p590a/; IRS News Release IR-2017-64, at
https://www.irs.gov/pub/irs-drop/n-18-83.pdf; and 2020 Limitations Adjusted As Provided in Section 415(d), etc.,
Notice 2019-59, at https://www.irs.gov/pub/irs-drop/n-19-59.pdf.
Data on IRA Assets, Sources of Funds, Ownership,
and Contributions
Table 6 contains data on the end-of-year assets in traditional and Roth IRAs from 2008 to 2019.
According to the Investment Company Institute, traditional IRAs held much more in assets than
Roth IRAs. At the end of 2019, total traditional IRA balances were $9.4 trillion and total Roth
IRA balances were $1.0 trillion. Within traditional IRAs, more funds flowed from employer-
sponsored pension rollovers than from regular contributions.29 For example, in 2017 (the latest
year for which such data are available), funds from rollovers were $463 billion, whereas funds
from contributions were $18.8 billion. 30 In contrast, within Roth IRAs in 2017, more funds
flowed from contributions ($23.5 billion) than from rollovers ($9.9 billion). 31
29 Generally, rollovers are tax-free distributions of assets from one retirement plan that are contributed to a second
retirement plan. Regular contributions are contributions to IRAs that are made from individuals’ pre - or post-tax
income (subject to the rules of the particular type of IRA).
30
See the Investment Company Institute, T he U.S. Retirement Market, First Quarter 2020, T able 11, at
https://www.ici.org/research/stats/retirement/.
31See the Investment Company Institute, T he U.S. Retirement Market, First Quarter 2020, T able 12, at
https://www.ici.org/research/stats/retirement/.
Congressional Research Service 13Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Table 6. Traditional and Roth IRAs: End of Year Assets
(in billions of dollars)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Traditional
3,257 3,941 4,340 4,459 4,969 5,828 6,225 6,387 6,824 8,018 7,850 9,350
IRAs
Roth IRAs 177 239 355 360 439 548 600 625 697 842 850 1,020
Source: Congressional Research Service (CRS) using data from the Investment Company Institute (ICI), The
U.S. Retirement Market, First Quarter 2020, Table 10, at https://www.ici.org/research/stats/retirement/. ICI
estimated 2018 and 2019 data.
Table 7 and Table 8 provide additional data on IRA ownership amounts among U.S. households.
The data are from CRS analysis of the 2016 Survey of Consumer Finances (SCF).32 The SCF is a
triennial survey conducted on behalf of the Board of Governors of the Federal Reserve and
contains detailed information on U.S. household finances, such as the amount and types of assets
owned, the amount and types of debt owed, and detailed demographic information on the head of
the household and spouse. 33 The SCF is designed to be nationally representative of the 126
million U.S. households in 2016.
Table 7 categorizes IRAs by the amount in the account. Among households that have IRAs,
61.2% have account balances of less than $100,000 and 4.4% have account balances of $1 million
or more. 34
Table 7. Distribution of Individual Retirement Account (IRA) Balances in 2016
Percentage of All U.S. Percentage of U.S. Households
Households with IRAs
No IRA 70.2% -
Account balance
$1 to $24,999 10.6% 35.6%
$25,000 to $49,999 3.7% 12.4%
$50,000 to $99,999 3.9% 13.2%
$100,000 to $249,999 5.5% 18.3%
$250,000 to $999,999 4.8% 16.1%
$1,000,000 to $2,499,999 1.1% 3.8%
$2,500,000 or more 0.2% 0.6%
Source: CRS analysis of 2016 Survey of Consumer Finances.
32
More information on the Survey of Consumer Finances (SCF) is available at http://www.federalreserve.gov/
econresdata/scf/scfindex.htm.
33
T he SCF data and codebook are available at https://www.federalreserve.gov/econres/scfindex.htm. In the SCF, the
head of the household is the individual in a single household, the male in a mixed-sex couple, or the older individual in
the case of a same-sex couple. T he SCF codebook indicates that “no judgment about the internal organization of the
households is implied by this organization of the data” and that the “term is euphemistic and merely reflects the
systematic way in which the data set has been organized.”
34 T he first figure is calculated by adding the percentages of U.S. households with I RAs with balances between $1 and
$99,999 (35.6% + 12.4% + 13.2% = 61.2%). T he second figure is calculated by adding the percentages with balances
of $1,000,000 or higher (3.8% + 0.6% = 4.4%).
Congressional Research Service 14Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Notes: Analysis does not include households with Keogh accounts. Balances represent the aggregate value of all
IRAs within a household.
Table 8 provides data on IRA ownership and account balances among households that owned
IRAs in 2016.
The following are some key points from Table 8 regarding IRA ownership:
In 2016, 29.8% of U.S. households had an IRA. Among households that owned
IRAs, the median account balance ($52,000) was smaller than the average
account balance ($201,240), which indicates that some households likely had
very large IRA account balances.
Households were more likely to own IRAs as the age of head of household
increased. The median and average account balances also increased as the age of
the head of the household increased.
The percentage of households with an IRA and the median and average account
balances increased with the income of the household. Among the explanations for
this finding are that (1) households with more income are better able to save for
retirement and (2) households with higher income are more likely to participate
in a defined contribution (DC) plan (like a 401(k)) and therefore have an account
to roll over. 35
Married households were more likely to have an IRA than single households and
their median and average account balances were also larger. The explanations
could include the following: both spouses in a married household might have
work histories, enabling both to save for retirement or a married household might
need larger retirement savings because two people would be using the retirement
savings for living expenses in retirement.
Table 8. Ownership and Account Balances for IRAs in 2016
Percentage of U.S.
Households with Median Account Average Account
Account Balance Balance
All Households 29.8% $52,000 $201,240
Age of the Head of the Household:
Younger than 35 15.0% $10,000 $19,672
35 to 44 26.7% $25,000 $63,888
45 to 54 29.7% $48,000 $135,070
55 to 64 37.5% $80,000 $262,733
65 and older 38.0% $117,000 $313,785
Household Income:
Less than $30,000 8.7% $16,000 $54,430
$30,000 to $49,999 19.3% $31,700 $71,670
$50,000 to $74,999 28.7% $32,000 $116,001
35
See CRS Report R43439, Worker Participation in Employer-Sponsored Pensions: A Fact Sheet.
Congressional Research Service 15Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Percentage of U.S.
Households with Median Account Average Account
Account Balance Balance
$75,000 to $124,999 41.7% $39,500 $136,682
$125,000 or more 64.9% $140,000 $361,951
Household Marital Status:
Married 36.3% $68,000 $236,711
Single 21.3% $32,000 $122,150
Race of the Head of the
Household a:
White, non-Hispanic 37.1% $60,000 $212,818
Otherb 32.1% $78,000 $283,407
Black/African-American 12.1% $15,000 $62,096
Hispanic 9.8% $14,000 $64,459
Source: CRS analysis of the 2016 Survey of Consumer Finances.
Notes: Median and average account balances are calculated using the aggregate value of all IRAs within
households that owned IRAs in 2016. Analysis does not include households with Keogh accounts.
a. The SCF’s question about race is only asked of the designated respondent. In 77% of sampled households,
the designated respondent was the head of household.
b. A race of “other” includes respondents who indicated that they identified as Asian, American Indian/Alaska
Native, or Native Hawaiian/Pacific Islander, among others. The SCF combined these categories in the public
dataset.
Table 9 and Table 10 describe taxpayer contributions to traditional and Roth IRAs in 2017. As
shown in the tables, in 2017, over two million more taxpayers contributed to Roth IRAs than
traditional IRAs. Almost half of taxpayers who contributed to traditional IRAs made the
maximum contribution for their age group, whereas slightly over one-third of taxpayers who
contributed to Roth IRAs made the maximum contribution. 36
Table 9. Contributions to Traditional IRAs in 2017
Percentage of
Average Contribution of
Contributing Taxpayers
Number of Contributing Taxpayers Who Did Not
Age Group Contributing the
Taxpayers Contribute the Maximum
Maximum Amount
Amount
($5,500 or $6,500)
20 under 30 233,115 35.4% $1,456
30 under 40 668,913 46.7% $1,883
40 under 50 867,546 51.3% $2,066
50 under 60 1,399,744 48.8% $2,499
60 under 70½ 1,316,200 54.7% $2,608
36
In 2017, the IRA contribution limit for individuals under age 50 was $5,500. Individuals aged 50 and older could
contribute an additional $1,000 “catch-up” contribution, or $6,500.
Congressional Research Service 16You can also read
